Abstract

We analyze the variables determining the exercise of the prepayment option in mortgages for Italian banks, by applying a specific model to measure the prepayment option in the case of refinancing option exercise. Considering a fixed-rate mortgage, we estimate a selected bank exposure's to interest rate risk. Main findings highlight that an increase in volatility causes an increase in option prices. In the case of a yield curve with a marked positive gradient, the prepayment option price exhibits high sensitivity to volatility changes. The prepayment option price can be considered a decreasing function of the credit spread and transaction costs.